Question

Diana is a personal trainer whose client Charles pays $80 per hour-long session. Charles values this service at $100 per hour, while the opportunity cost of Diana's time is $75 per hour. The government places a tax of $10 per hour on personal trainers. Before the tax, what is the total surplus?
a. $25
b. $20
c. $5
d. $0

Answer 1

Answer:

Option (a) $25

Explanation:

Data provided in the question:

Amount paid by the client by Charles = $80 per hour

Value put for the service by Charles = $100 per hour

Opportunity cost of Diana's time = $75 per hour

Tax = $10 per hour

Now,

Consumer Surplus

= Value put up by buyer for service - Amount actually paid for service

= $100 - $80

= $20

Producer Surplus

= Amount actually paid for session - Opportunity cost of seller

= $80 - $75

= $5

Therefore,

The Total surplus = Consumer Surplus  + Producer Surplus

= $20 + $5

= $25

Hence,

Option (a) $25